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Busting Myths on Debts and Bankruptcy

There is a lot of false information or ‘myths’ out there about debts and bankruptcy, which we have found to be harmful to people, causing them unnecessary stress and worry. Read on and let’s debunk those myths!

DEBT MYTHS

1. MYTH: “If I don’t pay my debts, I’ll go to prison.”

>>> TRUTH: Not being able to afford debt repayments is NOT a criminal offence. You won’t go to prison just because you can’t pay your debts although this was the case over a century ago. Some priority debts could result in imprisonment, for example magistrates fines, licences, child maintenance, business rates, but this would be used as a very last resort if you’ve ignored the debt, refused to pay or failed to cooperate with the courts. It would take a long time to get there, as many other debt enforcement methods would be used first.

>>> TRUTH: Creditors can only attach funds from your bank account if you have above £494.01 in your account. This amount is set by law and is periodically revised. If you have various accounts in different banks, £494.01 is protected in each account. You can challenge this bank arrestment through the courts if it is causing you hardship.

3. MYTH: “If my wages get arrested, creditors could take most of my wages.”

>>> TRUTH: The amount creditors could deduct from your wages is capped by law, depending on your income. For example, creditors cannot get anything from your wages if you earn less than £113.68 per week. If you earn between £113.68 and £410.9 per week, they can take £4 per week or 19% of any wages exceeding £113.68 per week, whichever is the greater. That’s the total amount creditors can get, so if there are several creditors they would have to share this amount between them. However, the situation is different if you owe money to the DWP (benefit overpayments), as they could take up to 40% of your net wages (or share this amount with other creditors) and leave you with 60% of net earnings.

4. MYTH: “Sheriff Officers could turn up at my door to intimidate me and can be quite aggressive.”

>>> TRUTH: Recent TV programmes may have shown images of abusive and aggressive ‘bailiffs’ (that’s the name for Sheriff Officers in England and Wales). However this is not the reality of Sheriff Officers’ behaviour in Scotland. If someone comes to your door, beware that they may not be actual Sheriff Officers but debt collectors working for creditors instead. These people don’t have any powers at all. Report any threatening behaviour to the Police.

5. MYTH: “Creditors can send Sheriff Officers to force entry into my property and take things from my house.”

>>> TRUTH: For Sheriff Officers to force entry into your property, there must have been a court order giving creditors permission to do so. Exceptional attachment orders are very, very rare in Scotland. You would be notified of any such visit in writing beforehand. To get to that point, creditors must prove that they have tried other means (e.g. bank arrestment) and that there is something worth getting in the house—which is why they will send someone round your home to try and get invited in. To avoid this, never let anyone in your property unless they have a court order.

6. MYTH: “If I don’t pay my debts, I will be blacklisted.”

>>> TRUTH: There is no such thing as a blacklist. However your debts, and whether or not you have repaid them, are recorded in your credit report. This is what creditors use to decide whether to lend you money. You can request a copy of your credit report and ask for any inaccurate information to be corrected.

7. MYTH: “My debts are written off if I haven’t made a payment in 5 years.”

>>> TRUTH: A debt can become “statute barred” (or “extinguished”) after5 years if the debtor hasn’t made a payment or admitted the debt AND if the creditor has not taken legal action to enforce the debt. The debt still exists but the creditor can no longer enforce the debt, i.e. they cannot arrest your wages or your bank account or make you bankrupt, although they may still continue to contact you and ask for payments. However, for some debts such as council tax arrears, court decrees and benefit overpayments, the time limit extends to 20 years before they can become “statute-barred” assuming all other conditions are also met (as explained above).

8. MYTH: “I am liable for my partner’s debts.”

>>> TRUTH: You are not liable for other people’s debts, unless there is a guarantor agreement, or a joint liability for a tenancy, a joint bank account or a joint loan agreement or council tax arrears for example.

BANKRUPTCY MYTHS

1. MYTH: “I cannot be made bankrupt because of council tax arrears.”

>>> TRUTH: You can be sequestrated for council tax arrears, especially if you are a home owner and the council suspects that you have equity in your house which could be used to repay the debt. It is also worth pointing out that in Scotland, water and sewerage charges are collected through council tax. Even if you get the maximum council tax reduction, you will still need to pay some money to the council every month for these water charges, or you would risk accruing arrears.

2. MYTH: “If I go bankrupt, I will automatically lose my home.”

>>> TRUTH: If you are a home owner, your house may be repossessed as bankruptcy gives your Trustee (who is in charge of your finances for the duration of the bankruptcy) the right to sell your assets for the benefits of your creditors. However, if you have little or no equity in your home, your Trustee may decide not to sell your property, as long as your mortgage is affordable and comparable to the cost of local rents.

>>> TRUTH: To go bankrupt, there is an initial fee, which is between £90 and £200 depending on your financial circumstances. You may have to pay some money towards your debts, known as a Debtor Contribution Order, for up to 4 years if you are assessed as having surplus income. However, if you are assessed as not having any surplus income or if you are on means-tested benefits, you won’t have to pay anything towards your debts once you are sequestrated.

4. MYTH: “If I go bankrupt, my name will appear in the local newspaper.”

>>> TRUTH: There used to be a section in the local newspaper for bankruptcy, to inform creditors. This is no longer the case. If you are sequestrated, your name will go on an online public register which is searchable by name.

For debt advice, call us on 0131 442 2100 to book an appointment.

Click here to read our next post on ‘Debunking Harmful Myths about Benefits’